Bloomberg News

Israel Bonds Climb on Speculation Interest Rate Cuts Will Resume

December 29, 2011

Dec. 28 (Bloomberg) -- Israel’s benchmark bonds rose for the first time in four days on speculation the central bank will resume interest-rate cuts in coming months as economic growth slows.

The yield on the benchmark 5.5 percent notes due in January 2022 declined one basis point, or 0.01 percentage point, to 4.54 percent at the 4:30 p.m. close in Tel Aviv. The rate has dropped 21 basis points this month. Two-year interest rate swaps, an indicator of investor expectations for rates over the period, were unchanged at 2.52 percent. The Bank of Israel held its benchmark interest rate at 2.75 percent on Dec. 26.

“The market was surprised the central bank did not cut rates but the central bank lowered its growth forecast and the rate cuts will continue,” Effi Cohen, a trader at Leader Capital Markets Ltd. in Tel Aviv said by telephone.

The central bank said it was leaving its rate unchanged, after reducing it twice in three months, as policy makers wanted to be able to react to future developments. The bank lowered its 2012 growth forecast to 2.8 percent from a September prediction of 3.2 percent, citing the European debt crisis.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, rose 0.1 percent to 257.60.

The shekel weakened for the first time in four days, dropping 0.6 percent against the dollar to 3.7995 at 5:10 p.m. The currency has declined 7.2 percent this year.

“We see local importers buying dollars,” said Rony Gitlin, a spot trader at Bank Leumi Le-Israel Ltd. in Tel Aviv. “This is the last week of the year and offshore banks and hedge funds are out of the game.”

The yield on the consumer price-linked notes due June 2013 increased three basis points to 0.79 percent. The two-year break-even rate, the yield difference between the inflation- linked bonds and fixed-rate government bonds of similar maturity, declined six points to 187, implying an average annual inflation rate of 1.87 percent.

--Editors: Susan Lerner, Shanthy Nambiar

To contact the reporter on this story: Shoshanna Solomon in Tel Aviv at ssolomon22@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net


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